Subprime Mortgage Crisis Looking Even MORE Like Savings and Loan Crisis

Last Friday, I wrote that the Fed Bailout (which was caused by the Subprime Mortgage Crisis) was similar to the Savings and Loan Crisis of 1987, except that it was caused by a pricing problem, not fraud. (See Fed Bailout Looking More Like Savings and Loan Crisis, 12/28/07).

After reading an article in Monday's Wall Street Journal, I'm not so sure. It explained how Ameriquest spent $20 million to lobby legislatures in Georgia, New Jersey and other states to relax laws that could have protected borrowers from taking on mortgages they really couldn't afford. Ameriquest has been sued for mortgage fraud.

What really concerns me is that Ameriquest was not alone. Several banks, including Citigroup, Countrywide and even the Mortgage Bankers Association were also involved in lobbying efforts. (Source: WSJ Online, Lender Lobbying Blitz Abetted Subprime Mortgage Mess, 12/31/07)

In the Savings and Loan Crisis five U.S. Senators, known as the Keating Five, were investigated by the Senate Ethics Committee for improper conduct. They had accepted $1.5 million in campaign contributions from Charles Keating, head of the Lincoln Savings and Loan Association. They had also put pressure on the Federal Home Loan Banking Board, who was investigating possible criminal activities at Lincoln.

If fraud and possibly illegal lobbying of government officials has occurred, then this crisis was caused by more than a pricing problem, which would have been easily solvable. (See Fed Governor Kroszner Says Credit Crisis May Not Be Over for an explanation of the pricing problem).

Fraud means that mortgage companies were more than just greedy or even negligent, they were downright unethical. If an intent to defraud is proven, I'm afraid that might mean this subprime mortgage crisis could spread as far into the economy as the Savings and Loan Crisis.

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